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Risk Management Failures During the Financial Crisis

In: The First Credit Market Turmoil Of The 21st Century Implications for Public Policy

Author

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  • Michel Crouhy

    (Research & Development, NATIXIS Corporate and Investment Bank, USA)

Abstract

The following sections are included:IntroductionInformation problemsLiquidity problemsWhat Went Wrong in Risk Management and Risk ModelingOver-reliance on misleading ratings from rating agencies“Cliff” effects or nonlinearities in the risk of subprime CDO tranchesWrong estimates of default rates and default correlationsSensitivities of the rating of senior subprime CDO tranches to estimation errors of delinquency rates, recovery rates and default correlationsOver-reliance on unrealistically simple risk modelsOver-reliance on inaccurate dataOver-reliance on short-term financing with too little consideration for liquidity riskLessons From This FiascoDifferentiate the ratings of corporate bonds and structured credit productsCheck the quality of the data about the underlying assets and make sure it is complete and timelyComplement the traditional VaR risk measure with worst-case scenario analysis and stress testingReferences

Suggested Citation

  • Michel Crouhy, 2009. "Risk Management Failures During the Financial Crisis," World Scientific Book Chapters, in: Douglas D Evanoff & Philipp Hartmann & George G Kaufman (ed.), The First Credit Market Turmoil Of The 21st Century Implications for Public Policy, chapter 15, pages 241-266, World Scientific Publishing Co. Pte. Ltd..
    • Handle: RePEc:wsi:wschap:9789814280488_0015
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    Cited by:

    1. Edward J. Balleisen & Elizabeth K. Brake, 2014. "Historical perspective and better regulatory governance: An agenda for institutional reform," Regulation & Governance, John Wiley & Sons, vol. 8(2), pages 222-245, June.

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